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Abstract

This paper studies the impact of municipal corporate bond on China's bond marketh which has developed rapidly as the second largest market globally but has limited efficient benchmark securities. We find that municipal corporate bonds provide benefits in four aspects: improve the investment opportunities set relative to existing bond instruments; enhance the process of price discovery, explaining at least 25% for enterprise bond yield spreads variations, and information from municipal corporate bonds transfers along industry and location channel; reduce the spreads of existing bond instruments when the supply of municipal corporate bonds is under moderate level; and promote long-term corporate debt security issues. The government (implicit) guarantee behind municipal corporate bond makes it better span systematic risk and complement the market incompleteness. Overall, our findings contribute to a comprehensive understanding of the role of government financing.

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